Deloitte Report Leather and Footwear

Enhancing firm level competitivenessIndian leather and footwear industry

Strategies and Road Map Development –A Report for NMCCAugust 2009

2

Contents

Foreword 3

Background 5

Objective and approach 6

Setting the Context : Overview of global and Indian leather industry 7India’s share of global leather exports 9

Market composition 11

Segment composition 14

Sub-segment composition 15

Key conclusions for Indian leather and footwear sector 19

Tracing the evolution of leather industry in India and China 22

Analysis of the Indian Leather Industry and key conclusions 26

Factor Conditions 27

Demand Conditions 37

Firms Structure and Rivalry 41

Supporting Industries 51

Government Support 54

Scenario Analysis 59

Key Conclusions and Recommendations 61

Annexure: Results of the Primary Survey 67

List of Abbreviations 82

Contacts 83

4

NMCC have undertaken a number of studies towards enhancing the competitiveness of manufacturing sector and identify the current strengths and constraints of keysectors, and recommend national level industry/sector specific policy initiatives

August 2009 5

Background

The National Manufacturing Competitiveness Council (NMCC) has been set up by the Government to provide a continuing forum for policy dialogue to energize and sustain the growth of manufacturing industries in India. In this context, the NMCC have undertaken a number of studies towards enhancing the competitiveness of manufacturing sector including identification of manufacturing sectors which have potential for global competitiveness; current strengths and constraints of identified sectors, and recommend National level industry/sector specific policy initiatives as may be required for augmenting the growth of manufacturing sector.

Deloitte Touche Tohmatsu India Pvt. Ltd. (Deloitte) have been engaged by NMCC to study and submit a report for enhancing the “Firm Level Competitiveness (Strategies and Road Map Development)” for the Indian “Leather and Footwear” sector.

This document is the subsequent sections details the Deloitte report on “Firm Level Competitiveness (Strategies and Road Map Development)” for the “Leather and Footwear” sector in India.

6

Objectives and approach

The objectives of the Deloitte engagement were

• Understandthecompetitivenessoffirmsacrosstheirsupply chain

• Fromtheresultsfororganizationsineachsector,identify the key areas for focus for the organizations based on the critical trends and factors driving success

• Fromtheabove,providethecontoursforstrategicinitiatives and detail a roadmap for implementation.

Approach

• Analyzetheperformanceoforganizationsbasedon data obtained through primary and secondary research.

• Inadditiontotheprimary/secondaryresearchoforganizations, Deloitte conducted primary research with key stakeholders and experts. The objective was be to validate the inputs from secondary research and obtain a perspective on the critical success factors and drivers for competitiveness of the sector.

• Theresultsfromtheabovewerethenbeaggregatedand analyzed to understand the “Gaps” in their performance with reference to the sector objectives defined by NMCC.

• Recommendationsbasedonthe“Gaps”identifiedfocusing on the key areas for consideration in each sector and a road map to achieve the sectoral objectives.

The results from the above were then be aggregated and analyzed to understand the “Gaps” in their performance with reference to the sector objectives defined by NMCC.

August 2009 7

Setting the context: Overview of global and Indian leather industryLeather Sector - GlobalThegloballeathertradewasvaluedataroundUS$100bnin2005.Organizationsinthedevelopedeconomiessource leather products from developing economies directly or through intermediaries while focusing on building brands.

Leading Footwear Clusters in addition to India

Source:ITCLeatherStatistics,2005

Leather Companies

Companies in fashion and accessories segment

LVMH, Gucci, Nike,Adidas etc

USA,Western Europe

China, India and other developing countries

Kasen Holdings, Yueyuen and numerous SMEs

Suppliers to BrandOwners

1 Vietnam / Indonesia• OEMproduction• FocusonlowcostssegmentsmainlyfortheEuropeanmarket

2 China• OEMproduction• FocusonlowcostssegmentsmainlyfortheUSmarket

3 Romania• ProductionsubsidiariesofItaliancompanies• Focusonlowertomediumpricerange

4 Italy• Design,marketing&productionofpremiumshoes• Exportwidelytotheworldmarket

5 Portugal• Production• Focusonshort-productionrunsinthemediumpricerange

6 United States• Designandmarketing• Focusonspecificmarketsegmentslikesportsandrecreationalshoeandboots• Manufacturingonlyinselectedlinessuchashandsewncasualsshoesandboots

1

2

3456

8

Leather Sector – Global : Weaknesses and Threats for Leading Clusters

Country Weakness Threat

Portugal Predominantly catering to European markets Competition from Chinese and other low cost countries

Romania

Italy High cost of labor Rising exports from the low cost countries

China Low value, high volume products TariffbarriersonChineseexportsbytheEuropeanUnion

Vietnam Predominantly a footwear manufacturer (esp. Sports shoes)

TariffbarriersonVietnameseexportsbytheEuropeanUnion

Indonesia Unstablepoliticalsystem,currencydepreciationforcing out companies from Indonesia

Rising costs due to raw material imports, flooding of the domestic market by Chinese manufacturers

UnitedStates High cost of labor Virtually no manufacturing of shoes except for defence units.

Source: The Global Footwear Industry , http://www.fibre2fashion.com/news/general-textile-industry-news/vietnam/newsdetails.aspx?news_id=64666

Classification of Leather & Footwear Industry

Leather and Footwear Industry

Finished Leather Leather Footwear Leather Garments /

Apparel Leather Goods

Source: Classification based on International Trade Center- Geneva

• Leatherfrombovineanimalsarecalledhidesandleather from sheep, goats, lambs and kids are called skins

• Therawmaterialfortheleatherindustryarehidesand skins which originate from livestock. The raw hides and skins are converted into finished leather in a tannery.

• Finishedleatheristheinputmaterialforleatherproducts like footwear, bags, gloves, garments etc.

• Inadditiontothecorevaluechain,therearealliedindustries like footwear components, product machinery etc. which have an influence in the performance of the leather and footwear segment.

August 2009 9

India’s Share of Global Leather ExportsIndia’s share in the global exports is 2.2% occupying the 9th position. China is the largest exporter of leather with a share of over 31% of world’s exports

Thecompositionofworldexportsisafiveyearaverage(2001to2005).ShareofIndiaandChinaarecalculatedonthebasisoftheaveragevalueofexportsduringtheperiod2001to2005.

Intra-country trade between China, Hong Kong, Macau and Taiwan have been taken into account while arriving at the market share.

Source: CLE, ITC

India’s composition of exports in Leather and Footwear (mn USD) – 2007-08

Composition of World Exports Average: 2001 - 2005

Others

China

Italy

Germany

Brazil

Spain

Belgium

United States of America

France

India

Korea

Thailand

Portugal

Indonesia

Netherlands

Romania

UK

31.9%

15.7%

4%3.4%3.2%

2.8%2.7%

2.6%2.2%

2.2%

2%

1.9%1.8%

1.8%1.7%1.6%1.4%1.4%

1.4%1%

1%

12.4%

Viet Nam

Malaysia

Austria

Argentina

Pakistan

45.9

766.93

1163.82

266.11

343.99

784.95

105.81

Finished leather

Leather footwear

Footwear components

Leather garments

Leather goods

Saddlery and harness

Non-leather footwear

10

India’s share in world leather trade had been in the decliningtrendfrom8.8%in1981to2.6%in2006,whereasChinahasincreaseditssharefrom0.41%in1981toaround31%in2006

• World’sproductionofshoeswithleatheruppersgrewby30%between1979and1996.

• Duringthisperiodproductionroseindevelopingcountriesby160%andtheirshareofglobaloutputgrew from 35 to71%

Source:ChinaandIndia:EconomicPerformance,CompetitionandCooperation-AnUpdate-T.N.Srinivasan–2004Datafrom2005-2006iscollectedfromITC,Comtradewebsites

China

India

10

8

6

4

2

0

1978-81 1982-84 1985-87 1988-91 1992-94 1995-97 1998-00 2000-06

% o

f wor

ld t

rade

31%

China India comparison - World leather trade

August 2009 11

51% of Indian exports are to Italy, Germany, China and theUK.However,thesecountriesaccountforonly27%of world imports of leather.

USA is the single largest importer consuming nearly 27% of total world imports. India’s exports to USA forms just 11% of its overall export value.

Even within India’s top export destinations, India’s share in their import portfolio is around 4%, while China’s share is around 9% - 15% in these regions.

Source : ITC

Market Composition

13.8%

13.7%

12%

11.4%11%

6.9%

5.7%

2.4%

1.9%1.2%1.5%1.1%1.2%

1.2%1.2%0.9%0.7%

1%11.2%

Italy

Germany

China

UK

USA

Spain

France

Netherlands

Portugal

United Arab Emirates

Korea

Belgium

Denmark

Australia

Canada

Viet Nam

Malaysia

South Africa

Others

42.4%

9.5%8%

3.1%

3%

2.6%2.3%

2.1%2%

1.6%1.5%1.5%1.4%1.2%1.2%1%

1%

14.7%


USA

Japan

Russian Federation

Germany

UK

Canada

Italy

Korea

Netherlands

France

Australia

Spain

Viet Nam

Kazakhstan

Belgium

Panama

Others

USAItalyGermanyFranceChinaUKJapanSpainBelgiumNetherlandsCanadaMexicoAustriaKoreaRomaniaSwitzerlandAustraliaPolandDenmarkPortugalOthers

26.9%

7.4%

7.5%

5.9%5.9%

5.9%

5.2%

2.7%

2.4%

2.2%

2.2%

1.7%1.5%

1.3%1.2%1.3%1.1%1.0%0.9%1.0%

15.0%

Composition of China exports Average : 2001 - 2005

Composition of World Imports Average : 2001 - 2005

Composition of India exports Average : 2001 - 2005

12

Market Composition:To top export destinations, India’s share in their import portfolio is around 4%

30%

25%

20%

15%

10%

5%

0%

60%

50%

40%

30%

20%

10%

0%

USA

Italy

Germany

France

China

Uk

Japan

Spain

Belgium

Netherlands

Canada

Mexico

Austria

Korea

Romania

Seitzerland

Australia

Poland

Denmark

Portugal

Others

India’s share of Country’s ImportsCountry’s Share of Total World Imports

48.8%

9.4%

12.7%

8.5%

15.7%17.3%

14.9%

28.8%

56.4%

36.9%

4.4% 4.6%

11.4%9.3%

20.6%

44.2%

51.2%

13.2%

4.9%

50.6%

India Share of Top Importing Countries Average: 2001 – 2005

China,30.9%

Share of World Exports

India, 2.2%

China’s share of the country’s Imports India’s share of the country’s Imports Country’s share of Total World Imports

Source : ITC

August 2009 13

Market Composition – Exports from key countries segment-wise (excluding India and China)

• Theexportvalueofthetop10countriesotherthanIndiaandChinaintheleatherandfootwearcategories

Apparel USD (‘000)

Italy 1353586

Malaysia 1255069

Germany 669130

Pakistan 618830

Thailand 597758

USA 595171

France 529953

Turkey 380378

Belgium 363580

UKandNorthernIreland 341880

Footwear USD(‘000)

Italy 8859980

Belgium 2522321

Germany 2421873

Spain 2189177

Brazil 1979367

Romania 1589037

Netherlands 1525036

France 1517768

Portugal 1486971

Indonesia 1428518

Leather Goods USD (‘000)

France 308419

USA 303204

Germany 127378

Italy 120362

Poland 117047

Mexico 115146

Brazil 109678

Austria 104551

Hungary 91010

Slovenia 78860

Finished Leather USD(‘000)

Italy 3913849

Brazil 1394313

USA 1082539

South Korea 855721

Argentina 810372

Germany 665486

Spain 378690

Thailand 335592

Pakistan 306662

France 298641

Source:ITC,2005

14

Segment Composition

Footwear constitutes 62% of world imports. However, India’s footwear exports form less than half (41%) of its total exports.

Also, finished leather which has significantly lower value addition compared to footwear constitutes 29% of India’s exports.

China exports just 2.8% in the form of Finished Leather and over 68% as footwear

Composition of World Imports Average : 2001 - 2006

16.4%

2.9%

17.8%

62.8%

Leather

Leather Goods

Leather Apparel

Footwear

Source : ITC , Comtrade

Composition of China Exports Average : 2001 - 2006

69.2%

26.1%

2.6% 1.9%

Footwear

Leather Apparel

Leather

Leather Goods

Composition of India Exports Average : 2001 - 2006

42.5%

28%

23%

6.3%

Footwear

Leather

Leather Apparel

Leather Goods

August 2009 15

Sub-Segment CompositionFinished Leather – SITC Code - 611Indiaexportsnearly40%ofitsfinishedleathertoChina.ItalyandSpainaretheotherkeydestinations.USAforms5.4%of global imports of finished leather but only 1.9% of India’s portfolio.

Source : ITC

Finished Leather Average % of India’s Exports : 2001 - 2005

China

Italy

Germany

Korea

Viet Nam

Spain

Malaysia

France

USA

Portugal

South Africa

Indonesia

Thailand

Russian Federation

Netherlands

Others

39.8%

15.1%

5.2%

5.1%

2.9%

6%

1.5%

2.8%

1.9%

2.4%

2.1%1.4%

1.9%

0.9%1% 9.8%

Finished Leather Average % of World Imports : 2001 - 2005

China

Italy

USA

Mexico

Romania

Germany

Spain

Poland

Hungary

Japan

Turkey

Canada

Others

26.2%

13.8%

5.4%

4.6%4.1%4.0%

3.8%

2.7%

2.6%

2.3%

3.1%

2.3%

1.7%1.2%

0.9%1.5%

1.7%1.1%

1.1%1.3%

14.8%

Vietnam

Korea

France

Portugal

Thailand

India

Slovenia

UK

16

Footwear – SITC Code - 851UK, Germany and Italy are the major export markets for Indian footwear. However, one of the largest markets USA(whichaccountsfor28.1%ofglobalimportsoffootwear)isnotamongthetopthreedestinationsforIndianfootwear exports.

UK

Germany

taly

United States of America

France

Spain

Netherlands


Portugal

Belgium

Denmark

Austria

Canada

Australia

Others

21.1%

17.6%

13.0%12.7%

6.5%

4.5%

2.8%

2.1%

2.3%

1.6%1.4%

1.2%

1.3%1.3%

10.9%

Leather Footwear Average % of India’s Exports : 2001 - 2005

Source : ITC

Leather Footwear Average % of World Imports : 2001 - 2005

Source : ITC

USA

China

Germany

UK

France

Italy

Japan

Belgium

Spain

Netherlands

Canada

Austria

Switzerland

Australia

Denmark

Others

28.1%

1.3%

7.8%

6.7%

6.5%6.1%

5.3%

2.7%

2.1%

2.4%

1.9%1.5%1.3%1.0%1.0%

24.4%

August 2009 17

Leather Goods – SITC Code - 612 USA,GermanyandtheUKarethemajorexportmarketsforIndia’sleathergoodsandarealsoleadingimportersofleather goods in the world. Mexico, the second largest importer of leather goods is not a key destination for India’s leather goods

Leather Goods Average % of India’s Exports : 2001 - 2005

Source : ITC

Leather Goods Avg % of World Imports 2001 - 2005

Source : ITC

USA

UK

Germany

France

Italy

Spain

Netherlands

China

Sweden

Australia

Belgium

Canada

Denmark

Malaysia


Others

18.9%

11.6%

15.7%

9.2%

7.6%

6.3%

4.0%

3.2%

2.8%

3.4%

2.1%

10.2%

1.6%1.9%

0.5%1.2% 18.6%

12.5%

6.3%

5.7%

3.5%4.4%4.2%

3.7%

4.8%

3.1%

2.3%

1.8%

2.3%

2.0%

1.9%

1.4%0.6%

1.6%1.3%

1.6%1.4%1.0%0.6%

2.5%11.0%

USA

Mexico

UK

Germany

Canada

France

Czech Republic

Japan

Slovenia

China

Hungary

Spain

Belgium

Poland

Italy

Singapore


Netherlands

Australia

Sweden

Switzerland

Romania

Russian Federation

Austria

Others

18

Leather Apparel – SITC Code - 848 Germany,SpainandItalyarethemajordestinationsforIndia’sleatherapparel.USAforms33.9%ofglobalimportsofleather apparel but only 16.9% of India’s portfolio.

Leather Apparel Average % of India’s Exports : 2001 - 2005 Leather Apparel Avg % of World Imports 2001 - 2005

Denmark

Italy

Germany

Spain

USA

France

UK

Netherlands Others

Canada

Australia

Chile

Belgium

Sweden

Portugal

16.8%

15.3%

16.9%

7.0%

7.2%

3.0%

2.0%

1.8%1.3%1.2%

1.4%1.4%

1.1%11.8%

USA

Japan

Germany

China

France

UK

Italy

Spain

Canada

Belgium

Netherlands

Switzerland

Australia

Austria

Sweden

Denmark

Mexico

Others

33.9%

7.1%

7.3%1.2%5.1%

5.3%

3.9%

2.9%

3.0%

2.2%

1.9%1.6%1.3%1.4%1.1%1.0%1.0%

18.8%

August 2009 19

Key conclusions for Indian leather and footwear sector

Low market share, declining over a period a time

• India’sshareofglobalexportswasonlyabout2.2%fortheperiod2001–2005

• India’ssharedeclinedfrom8%in1980sto current levels.

• Incomparison,China’sshareincreasedfrom0.41%in1981toaround35%in2005

Low share of value-added products

• India’sfootwearexportsformedlessthanhalf(41%)ofitstotalexports.Onthecontrary,finishedleatherwhich has significantly lower value addition compared to footwear constituted 29% of India’s exports.

• Incomparison,Chinaexported68.2%asfootwearand 2.8% as finished leather.

Export portfolio not aligned to key segments

• Indiaexportedabout71%asvalueaddedproductsnamely leather footwear, leather apparel and leather goods.

• Footwearconstituted62%ofworldimports.However, India’s footwear exports as mentioned earlier formed less than half (41%) of its total exports. However, finished leather constituted 29% of India’s exports while the share of finished leather in the global imports is only 18%.

• Incomparison,Chinaexportedashighas97.2%asvalue added products.

Geographic portfolio not aligned to key markets

• Oneofthelargestmarketsforfootwear–USA(which accounted for 28.1% of global imports) is not among the top three destinations for Indian footwear exports.Similarly,USAforms33.9%ofglobalimportsof leather apparel but only 16.9% of India’s portfolio.

• OnesegmentwhereIndiaisalignedtokeycustomermarkets is finished leather which is in the upstream side of the value chain.

• Incomparison,theUSAwhichisthelargestimporterof leather products is the top destination for China.

In summary, China has aligned itself significantly better to the global leather trade compared to India

In summary, China has aligned itself significantly better to the global leather trade compared to India

20

IndiaandChinaevolvedasleadingfootwearproducingnationsduringthesametimeperiod(around1980s).However, over the next two decades, China became the world’s leading producer of leather and footwear products while India’s market share reduced during the same time period

Zone Year Countries

1 1960s USA,Europeancountries(Germany,France,UKetc)

2 1970s-80s Korea, Taiwan

3 After1980 China, India

4 After1990 Vietnam, Indonesia, Brazil

5 After2000 African Countries (Ethiopia, Kenya etc)

India’sshareinworldleathertradehadbeeninthedecliningtrendfrom8.8%in1981to2.3%in2005,whereasChinahasincreaseditssharefrom0.41%in1981toaround35%in2005.

4

5 4

11

2

3

August 2009 21

India and China had exported equal number of pairs ofleatherfootwearduringearly80s.HoweverChina’sfootwear exports had increased multifold and it is now the world’s largest supplier of leather footwear.

• Basedontheabove,studyingthegrowthpatternofleather industry in China would enable us understand the key factors that led to growth and the initiatives at various levels that would enable competitiveness of the sector and firms in the sector.

In the region, Vietnam is an emerging center in the global leather and footwear trade that could have been considered for comparison. However, Vietnam could not fit into the comparative analysis due to the following reasons while China was best placed.

• Vietnam,unlikeIndiaandChinaisfocusedsignificantlyonthefootwearsegment(about78%oftheircapacityisformanufacturingfootwear).

• Even,inthefootwearcategory,Vietnam’sfocusisonsportsshoes(70%ofthetotalfootwearproduced).• Globalmarketshareisaround1.4%ascomparedto2.3%forIndiaand31%ofChina.Henceidentificationofthecriticalsuccessfactors

for growth would be more relevant for India when compared with China than with Vietnam

• Incidentally,50%oftheVietnameseleatherfirmsareforeignowned(similartoChina)

Exports of leather footwear from China and India

Pairs (mn)

Source:FAO,ChinaLeatherIndustry Association’s website, Council for Leather Exports website

China’s export data includes inter-country trade by Hong Kong

Report on The status of Vietnam leather goods and footwearIndustryin2006andsixmonthsof2007–Dr.Nguyen Thi Tong

1400

1200

1000

800

600

400

200

0

1986-88 1989-91 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2007

China

India

• TheCAGRofChina’sfootwearexportsduringtheperiod was around 13% while India’s CAGR stood at 11%

22

Tracing the evolution of leather industry in India and China

Evolution of China’s Leather Sector (Wenzhou Cluster)

The growth of the leather industry in China is attributed to the first wave of economic reforms in 1978 with rapid development of Town and Village OwnedEnterprises(TVEs)andsecondwavewithforeignfirmsinvestinginChina.In2000,nearly24%oftheleatherfirmswereforeignownedaccounting for 57% of total sales.

Till 1900s 1900 – 1950s 1950 - 1978 1978 – till now

Traditional Business: Shoe making has a history of more than 500yearsinWenzhou.Duringthe Ming Dynasty (1368-1644), Wenzhou footwear was known for its exquisite quality and was produced exclusively for the Royal Family

Initial Industrialization: During 1910s,footwearindustryinWenzhou flourished with shoe makers learning advanced techniques and setting up many factories.Intheearly1950s,the Government had taken over almost all the shoe factories and the remaining factories were closed

Pre-Economic Reforms: Private shoe manufacturing was largely depressed in this time. State OwnedEnterprises(SOE)alsodid not perform well and in the year 1978, only 19 factories were operationalproducingaround0.5mn pairs a year.

Economic reforms and open door policy:

First Wave - 1978-1991: Rapid development of Town and Village OwnedEnterprises.

Second Wave –since1991:Rapid development of Foreign InvestedEnterprises&PrivateOwnedEnterprises.80%ofthe foreign invested firms were Taiwaneseinthe1990s.

Incentives provided by the Government: 2 year tax exemption,50%incometaxonthe third year, single-window clearance for all approvals and delegation to local authorities for approving foreign investments.

Sources:TheRoleofClusteringinRuralIndustrialization:ACaseStudyoftheFootwearIndustryinWenzhou:May2007,NewCompetition:ForeignDirectInvestmentandIndustrialDevelopmentinChina:2004CLECountryStudy–ChinaTrade liberalization and environmental protection - A Study of Leather Industry in Brazil, China and India

August 2009 23

After the economic reforms, the leather industry saw more conducive environment for growth with the rise in TVEs and FIEs

Leather Industry Development of TVEs:AsmoreandmoreSOEswereclosed, footwear products were in short supply. This strong market demand prompted the rapid development of TVEs.

Division of Labour: TVEs specialized in producing single / few processes / sub-components for the footwear industry which brought down the technical barriers to entry

Access to Capital: Most of the credit was through own funds and funds from friends / relatives. Trade credits were also common.

Government’s policy to support FIEs: Incentives were providedforFIEsrangingfromtaxholidaysfor2years,50%on tax in the third year, single window clearances and power for the local governments to promote FIEs

Rise of FIEs: In the second wave of the economic reforms, FIE investment flowed in predominantly from Hong Kong and Taiwan.

Access to markets: FIEs brought in the access to markets. Taiwaneseinvestmentcomprised80%ofthetotalforeigninvestment in the leather sector in China which was instrumentalinaccessingtheUSmarket.

Sources:ForeignDirectInvestmentandIndustrialDevelopmentinChina,2004OwnershipbiasesandFDIinChina,YashengHuang2008

1978 - 1991 1992 – till now

Economic Reform Phase 1: The basic institutional framework of central planning remained largely intact. Meanwhile new competitive forces were injected into the economy through transitional institutions. Competitive product markets were created by curtailing central planning and moving towards market-based prices.

Dual Track Reform: The dual-track price reform was based upon the logic of continual enforcement of the central planning while simultaneously liberalizing the markets. Underthis,‘central’economicagentswereassignedrightstoand obligations for fixed quantities of goods at fixed planned prices as specified in the pre-existing plan. Meanwhile, a ‘market’trackwasintroducedunderwhicheconomicagentsparticipated in the market with free market prices, provided that they fulfill their obligation under the plan.

Phase 2: Major reforms included the unification of exchange rates, current account convertibility, the reform of tax and fiscal systems, the reorganization of financial regulatory system, the adoption of Western accounting rules

Moving towards ‘Market’ economy:The‘Central’economic agents were slowly reorganized to improve their competitiveness.SOEswereorganizationallyrestructuredintolimited liability corporations according to the newly passed Company Law. They were required to induct Directors to form boards, to hold shareholder meetings and to establish boards of supervisors.

24

Rise of TVEs and FIEs, Cluster based approach and the government’s incentives were the key reasons for the growth of leather industry in China

• RiseofTownandVillageOwnedEnterprises(TVEs)in the first wave (1978-1991) and the penetration of Foreign Invested Enterprises (FIEs) in the second wave (from 1991)

– MostoftheinvestmentsfromHongKongandTaiwan.

• Clusterbasedapproachbroughtdowntheentrybarriers and improved the operational efficiency

– Highlevelofdivisionoflabor.

• IncentivesprovidedbytheGovernmentfortheForeign Invested Enterprises (FIEs)

– Incentivesrangingfromsubsidizedland,power,reduction of import duties, tax holidays etc.

• Overallimprovementintheinfrastructurewhichenhanced the competitiveness of the industry.

• ThefavorablefactorconditionspresentinChinawas utilized well by the FIEs who enabled China to become a leading exporter by providing easy access to its customers.

The Indian leather industry had evolved from being a semi-finishedleatherexporterinthe1960stoexporterof high quality leather footwear and products today. While there is significant potential for growth, Indian leather exports achieved a moderate growth rate of around7%inthelast10years.

1850s – 1930s 1930s – 1940s 1950s- 1980s 1980s – till now

Cottage Industry: British government aimed at procuring cheap semi-finished leather and exporting it to Europe for processing

Mechanization of the factories:Mass production with professionallabour–primarily vegetable tanning otherwiseknownas‘EastIndia tanning’

Mechanization gained momentum:During this time, mechanization rapidly increased. Chrome tanning was introduced and there was increasing demand for finished leather in the foreign markets. Tanners setup their own footwear upper manufacturing units

Government Focus: Employment generation, Earning foreign exchange through Reservation and Restriction on semi-finished leather

Small Scale reservation: Incentives and licensing policies aimed at promoting leather and footwear industry in Small and Medium sector

Focus on Value addition in leather industry: Government restricted the export of semi-finished leather by imposing export tax

Ban on the export of semi-finished leather & Focus on Leather Products: Import duties on all tannery, finishing, footwear, and other leather goods machinery were lowered to a uniform rate of 25%.

Outsourcing: Increasingly large footwear companies outsourced their labour-intensive less-critical operations to SSI sector

De-reservation of Leather & Leather Products in 2001: To enable economies of scale to compete in the global market However, Less developed component industry affects the growth of the leather sector

Source: Trade Liberalization and the Restructuring of Tamil Nadu’s Leather Sector: Coping with Liberalization’s New Environmental Challenges and Lessons from Prior Episodes of Adjustment - Meenu TewariCompetitivenessthroughexportclustering:Strategicconsiderations-UNIDO-2005

August 2009 25

100%

80%

60%

40%

20%

0%

1975-76 1977-78 1979-80 1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 2007-08

Semi finished leather

Indian leather industry is moving up the value chain with leather products constituting more than 75% of the exports

• Indiangovernmentbannedtheexportofsemi-finishedleatherin1991inordertostimulatethevalueadditioninthe leather sector

• In2007-08,theshareoffinishedleatherwasaround22%andtheremainingshareisfromvalueaddedproducts

While Indian leather exports grew at a rate of 8.8% (despite a low market share) during the period 2001-2005,Chinagrewatmorethan12%overthesame time. India’s stagnant market share in world exports can be attributed to sub-optimal scales, low level of FDI and lack of supporting industries

• MajorityoftheIndianfirmsareproprietorship/partnership / privately owned companies

– Lackofscaleeconomiesduetoinvestmentconstraints

– Lackofawarenessonlatestmanagementtechniques and decision making abilities

• LowlevelsofFDIintheleathersector;OnlyRs200Croresfrom1991to2005

– Foreignfirms,whowereinstrumentalinboosting China’s exports to world markets were absent in India.

– IndianleathersectorwasdevoidofFDIwhichtypicallybringsinstate-of–theartmachinery,best practices in the industry and efficiencies in operations / management that would positively influence the competitiveness of the sector.

• Thefootwearaccessoriesindustryislessdeveloped ( most of the companies possess small capacities) leading to supply constraints and sub-optimal scales. India is dependant on China for most of the accessories.

• IndianfirmswerenaturallyalignedtoEuropeanmarkets, given its requirement for low-volume, high-variety products. Indian firms were not typically preferableforthehigh-volumeUSmarketwhichisworld’s largest consumer

Leather products Finished leather Semi finished leather

26

Analysis of the Indian leather industry and key conclusions

Porter’s Diamond Framework has been employed to compare the competitiveness of Chinese and Indian leather industry

Government

Factor Conditions

FirmStructure&Rivalry

Demand Conditions

Support Industries

• Economicreforms• Incentivesforfirms• Attractingforeign

investments

• Laborcost• Infrastructurerelatedcosts• AccesstoCapital• Rawmaterialavailability

• UpstreamanddownstreamIndustries

• AssociationsandInstitutions

• AccesstoForeignmarkets• Localdemand

• Structureoftheindustry• ForeignDirectInvestment• Collaborative/clusterbased

approach among firms

August 2009 27

Factor Conditions

Labor costInfrastructureAccess to capitalRaw material availability

28

Labor costDeveloping countries in Asia took advantage of the shift in the leather and footwear manufacturing, predominantly due to the lower labour costs. India’s labour cost is about 3% of Italy’s labour cost and China’s labour costs are around 7% of Italy’s labour cost

• Theslowtechnicaldevelopmentinfootwearoperations,particularlyintheproductionofuppersmakefootwearmanufacturing a labour intensive operation as a result of which companies are forced to move to /access countries and regions with lower wages.

• Thisistheprimaryreasonfortheshiftinthegeographiesofleatherproductioninthe80s.WhileinItalylabourcostsaccountsfor38%oftheproductioncosts,itislessthan10%indevelopingcountries

Worker Cost in 2008 (USD/Hr)

0.43 0.48 0.75 1.08 1.1 1.152.59

4.16

6.93

15.13

25.24

30

25

20

15

10

5

0

India Vietnam Indonesia Thailand China Pilippines Mexico Brazil Korea Italy Japan

USD

Source:“Thegloballeathervaluechain”–PresentedtoUNIDO,Feb28,2001‘Leathers’July08edition–CLE,WorldBankreport-2004

August 2009 29

In the key segment of footwear, the labour cost per item in India is cheaper by 41% over China although the productivity of Chinese employees is higher by 33% (in leather garments/apparel India and China have the same effective cost). Also, China’s labor policies are perceived as more employer friendly than India’s labor policies.

Product

Daily Production (Pairs / Nos)

Monthly Production (pairs/Nos)

Monthly Wages (USD)

Labour cost per item(USD)

India China India China India China India China

Shoes (Men) 4 6 120 180 103 264 0.86 1.47

Shoes (Women) 12 15 360 450 103 264 0.29 0.59

Garments (Jackets) 2 5 60 150 103 264 1.72 1.76

Bags (Women) 8 10 240 300 103 264 0.43 0.88

Wallets 12 15 360 450 103 264 0.29 0.59

Country Hiring and Firing Practices

India 2.6

China 4.5

Bangladesh 4

Srilanka 2.7

Pakistan 4.5

Korea 4.1

Singapore 5.9

Malaysia 4

Thailand 4.2

1–ImpededbyRegulations7–Flexibilitydeterminedbyemployers

Factor Condition Importance China India

Labor Cost

Source:‘Leathers’July2008–magazinefromCLE,Eximbankreport–2006,TheIndianFootwear&LeatherIndustry–CII,GlobalCompetitivenessReport–2005-06,GlobalCompetitivenessReport–Worldbank2005-06

30

Rising labor costs in China forces the migration of the leather companies towards the central and western region

• MostoftheChineseleathercompaniesaresituatedin the east coast of China and labour costs are increasing in the east coast due to high economic activity.

– Labourcostinleatherindustryincreasedfrom0.39$/hrin2003to1.1$/hrin2008

• ThehigherlabourcostsaredrivenbythenewLabourContract Law ( LCL) which mandates transparent employment terms and empowers workers to bring legal action against employers who do not pay proper wages, insurance etc.

• Duetothesereasons,Chinesecompaniesareforcedto relocate their factories to interior provinces of China where labour costs are relatively low.

• Companiesinthecoastalregionswouldfocusonhighvalue products and the companies moving into the central and the western region on low value products

While India has an advantage on unit costs today, Indian leather companies are facing severe attrition and there is a shortage of skilled and semi-skilled labour

Operation No of employees (mn)

Primary Collection 1

Tanning(Organized) 0.1

Footwear(Cottage&Household)

0.9

Footwear(Organized) 0.2

OtherleatherProducts(Organized)

0.3

• LeatherandFootwearindustrywasencouragedbythe government as a means to increase employment generation. The sector was under SSI reservation till2001.

• Totalemploymentinthissectorwouldamountto2.5million(30%ofwhicharewomen)

• Footwearindustryprovidesemploymenttotheuneducatedpopulation-40%ofemploymentisrepresented by unskilled workers doing table work operation in the assembly line

• Inthelastfewyearsthereisasevereattritioninthecompanies (with the rate around 15%)

– Thereisalackofskilled&semi-skilledlaborcausingthe increase in attrition

– ThesettingupofSEZsofotherindustriesnearthe leather production clusters has also led to increase in attrition. For e.g. In Tamil Nadu, companies which produces electronics parts and products in Sriperumpudur attract labor from the nearby leather cluster (Ranipet). These electronics companies provide attractive salaries, transportation facilities and good working conditions which attracts labor from leather industry

Source:“Thegloballeathervaluechain”–PresentedtoUNIDO,Feb28,2001,‘Leathers’July08edition–CLE,WorldBankreport-2004

Risng Labour Costs in Chinese leather Industry

USD

1.5

1.3

1.1

0.9

0.7

0.5

0.3

0.1

-0.1 2003 2004 2005 2006 2007 2008

0.390.44

0.510.6

0.7

1.1

Key issue for China: Increasing labour costsKey issue for India: Shortage of skilled labour

August 2009 31

Infrastructure• India’sinfrastructureactsasasignificantdeterrentto

its competitiveness compared to competing countries like China

Country Logistics cost (cents per Km)

France 5.5

Japan 3.7

Canada 2.0

India 7.0

China 5.0

AccordingtotheWorldBankLogisticsReport2007,thatratedIndia39thamong150nations,someofthereasons for high costs of logistics in India

• QualityofInfrastructure• Competenceofprivateandpubliclogisticsservice

providers • Higherclearancetimeinentrylocationslikeportsand

other border agencies• Reliabilityofthetradingsystemandthesupplychain

Corroborating the above, Indian logistics is characterized by higher levels of inventory and therefore warehousing costsdrivenbylowspeedsonhighways(average30Kmperhrasagainst60kmperhrinEurope)

• PoweroutagesareveryfrequentinIndia,whilethereis an outage only once in two weeks in China. Indian companies are losing about 8.4% a year on the sales compared to less than 2% in China

Share of firms owning Generators (by Size)

Country Micro Small / Medium

Large / Very Large

China 0% 14% 38%

India 23% 76% 91%

Sources: Current status of logistics in India- G. Vaidyanathan, CII Institute of Logistics, Infrastructure Challenges in East and South Asia–March2006,EmergingMarketsInfrastructure:JustGettingStarted-MorganStanley–April2008,BusinessEnvironmentandComparative Advantage in Africa: Evidence from the Investment ClimateData,2005,Theimpactofbusinessenvironmentandeconomic geography on plant level productivity: An analysis of Indianindustry,TheWorldBank-June2005.TradelogisticsintheGlobalEconomy-TheworldbankLogisticsreport2007

Sources: The impact of business environment and economic geography on plant level productivity: an analysis of Indian industry,DevelopmentResearchGroup-TheWorldBank-June2005,InfrastructureChallengesinEastandSouthAsia–March2006,Emerging Markets Infrastructure: Just Getting Started-Morgan Stanley–April2008

• Theaverageclearancetimeintheportsisnearly3.47days in India compared to 16 hours in China

Country Documents for Export

Time for Export (Days)

Documents for import

Time for import (Days)

India 10 22 36 15

China 6 7 20 11

USA 6 5 9 5

Indonesia 7 3 25 10

Taiwan 8 9 14 8

Korea 5 3 12 8

Time for exports/imports refers to the time the business starts preparing the necessary documents to export/imports goods until the time the cargo is in the warehouse.

• China’sinfrastructureisrankedhigherthanIndia’sinfrastructure in all the sub-sectors (Electricity, Water, Roads and Ports) which helps in its development of trade

Country Electricity Water Roads Ports

China 4.6 4.9 4.6 3.8

India 2.7 4.6 3.3 3

1- Worst7 - Best


Infrastructure

32

Infrastructure: Primary SurveyNearly70%oftherespondentsbelievethatcustomsclearance,inlandtransportationdelaysandpoweroutagesarethe key disablers of their competitiveness

Source: Primary Survey conducted by Deloitte

% of companies who responded that infrastructure has significant impact

Customs Clearance delays

Inland Transport delays

PowerOutages/Cost of own power

Water Others

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

.%

Multiple responses allowed

August 2009 33

• Theoutcomeofthisallocativepatternisthatprivateentrepreneurs accessed capital by selling their equity shares to companies based in Hong Kong and Taiwan.

• However,post1997Chinesebankshavebeenproviding finance to private firms after the credit quotas have been removed by the government.

Indian SMEs in the leather sector have very low access to the bank funds though leather has been a priority sector for lending.

• ManyofthesmallandmediumbusinessesinIndiadonotaccessbankcapital.Only16%oftheloansfind the way to the SME sector and since more than 75% of Indian companies are in the SME sector, their access to bank funds is low.

• Mostoftheinvestmentrequirementsoftheleather sector is funded through internal sources or community funding, which remain the preferred sources of financing.

• Poormaintenanceofthebooksofaccountshasmadeit difficult to access bank loans which require clear and transparent accounting practices.

Factor Condition

Importance China India

Access to capital

Access to CapitalIn China, Capital was denied to private firms during 1980s.Mostofthestartupcompaniesusedtheirownfunds. During the emergence of FIEs most of them sold their stake to foreign investors

• Alargenumberofleathercompanieswhichwerestartedduringthe1980susedownfundsorcapitalborrowed from friends / relatives

• Anothercommonpracticewastheuseoftradecredits from upstream and downstream enterprises to ease working capital constraints. Members of the footwear clusters are located in close proximity to one another, leading to repeated business transactions and the formation of a certain level of trust among the upstream and downstream firms in the production chain.

• Inindustriessuchasgarmentsandshoe-making,Chinese private firms ought to have possessed strong competitive advantages, but poor allocative decisions of Chinese financial institutions imply that a severe mismatch between human and financial capital exists—i.e., efficient private firms were denied financing,whereasinefficientSOEsarefavored.

Sources of Capital - 1980s

66.00%

24.50%

0.30%8.35%

OwnFunds

Relatives&friends

Banks

PublicFundsandOthers

Source: The Role of Clustering in Rural Industrialization: A Case StudyoftheFootwearIndustryinWenzhou:May2007,Therole of Foreign-Invested Enterprises in The Chinese economy: an Institutional Foundation approach - Yasheng Huang

34

Raw Material AvailabilityChina’s high production of leather is not reflected in the quality of domestic hides and skins due to poor slaughtering practices and inferior quality of cattle

• ThoughChinaistheleadingproducerofhidesandskins, the quality of Chinese leather is considered to beofinferiorquality.ForE.g.Nearly70%ofpigskinproduced by China are inferior in quality*. The quality of the skin is inferior because of:

– Damagesinthehidesbecauseofinjuries,whipmarks and gadflies.

– Hidesarenotstrongorthickbecausethecattleismostly old and sick when slaughtered

– Someslaughterhousesdamagetheskinsunintentionally due to their low technology.

Source:FAO,EXIMBankreport,*-CLECountrystudyofChinahttp://economictimes.indiatimes.com/News/News-By-Industry/ET-Cetera/India-should-look-at-improving-pig-raising-practices/articleshow/4480325.cmshttp://www.thehindubusinessline.com/2004/07/13/stories/2004071301630300.htm

• Thequalityofdomesticleatherproductionisinconsistent and varies among different production centers.

• India: Pig farming in India is in nascent stage. Pigs constitute only 2.78% of our live stock (around 13.5 million).As majority of Indians don’t prefer pig meat (pork), the consumption of pork is only 7% of the total meat consumption. Therefore, CLRI is now developing leather from low grade cattle skins that can compete with the Chinese pig skin leather.

Production of Skins of Goats and Kids - country-wise - 2004

Production of Bovine Hides and Skins - Country-wise - 2004

Production of Skins of Sheeps & Lambs - country-wise - 2004

0.14%

0.13%

0.12%

0.07%0.04%0.04%

0.03%0.02%

0.02%0.02%

0.36%

Brazil

USA

China

India

Argentina

Russia

Australia

Mexico

France

Italy

Others

0.17%

0.1%

0.08%

0.05%

0.05%0.04%0.04%0.02%

0.02%0.02%

0.40%

Algeria

Turkey

Others

New Zealand

Australia

UK

India

Spain

Iran

South Africa

China China

New Zealand

Australia

UK

India

Spain

Iran

South Africa

Algeria

Turkey

Others

0.3%

0.27%0.07%

0.06%

0.03%0.02%0.01%0.01%0.01%0.01%

0.22%

August 2009 35

Trade with Hong Kong, Macau and Taiwan considered in the above data

Production and Import of light bovine leather - China

Production

Due to the poor quality of the domestic hides, China imports large quantity of leather and the trend is increasing over the years.

• Availabilityoflivestock(rawmaterials)hasamoderate impact on the leather industry.

• ChinaproduceslessersqftofcowskinscomparedtoIndia. However, there are no shortages as the shortfall is met through imports

• CountrieslikeChina,Vietnam,Thailandetcareimporting leather in finished / semi-finished form to manufacture leather footwear / products.

• InChina,nearly80%oftheleatherusedformanufacturing is imported from various countries

Import Value of leather by the countries (‘000 USD)

2001 2002 2003 2004 2005

China 3,634,806 3,587,837 4,085,898 4,725,088 4,841,649

Vietnam 224,909 361,559 492,607 NA NA

Thailand 214,493 234,224 306,364 302,551 333,219

mn S

q f

t

9000

8000

7000

6000

5000

4000

3000

2000

1000

0

1986-88 1989-91 1992 1993 1994 1995 1996 1997 1998 1999 2000 2201 2002 2003

Source:ITC,FAO2005

36

India is rich in the availability of cattle and has the highest share of bovine animals in the world. But the production of hides from bovine animals is low due to the ban on cow-slaughtering in a majority of Indian states

• Theslaughteringofcowsisbannedinmost Indian states.

– TheanimalisconsideredsacredbyIndia'smajoritycommunity and beef is not consumed by most of the people in India

• However,Cowslaughteringcontinuestobecarriedout in unlicensed abattoirs.

– AccordingtoDeptofAnimalHusbandry,thereare approximately 25776 unlicensed abattoirs in operation in India today against 5521 legal abattoirs.

• Thisalsoaffectsthequalityofhideswhichislowonaccount of improper slaughtering practices.

• Giventheabove,corporate/organizedplayerswouldfind it infeasible/difficult to deal / operate in this segment

Source of raw hides % in total consumption

Raw hide from slaughtered animals

60%

Raw hide from fallen animals

30%

Imports 10%

Factor Condition


Raw Material Availability

Source:CompiledfromFAO,EXIMBankreport,PETA-TheHindu,Sep12,2003,DeptofAnimalHusbandry

Country- wise share of Bovine Animals -2005 Production of Bovine Hides and Skins -Country-wise -2004

India

Brazil

China

USA

Argentina

Pakistan

Ethiopia

Sudan

Mexico

Australia

Others

USA

China

Brazil

India

Argentina

Russia

Australia

Mexico

France

Italy

Others

August 2009 37

Access to market

Demand Conditions

38

Domestic demand – Indian footwear industry• India’sfootwearindustryisvaluedataround$5bnandnearly1.8bnpairs.Thedomesticmarketishighly

competitive with few national players and multinational players present in the organized segment and a large unorganized segment characterized by chappals / sandals served by small scale players

• ThegrowthrateoftheIndiandomesticfootwearindustryisaround8%andispredictedtogrowataround7.5~8% in the near future.

Source: Council of Leather exports, Datamonitor(Export of leather uppers not included )

• India’scurrentmarketsizeisaround$5bn• Population–1.1bn• Percapitaconsumption–1.6pairs/yr• Averagevalueofafootwear=($5bn)/(1.1bn*1.6) – $2.84perpairoffootwear – Rs.128perpair(1USD=Rs45)

Indian Footwear Industry - Value

10

9

8

7

6

5

4

3

2

1

0

% g

row

th

(in b

n U

SD)

15.0%

13.0%

11.0%

9.0%

7.0%

5.0%

2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E

Year

August 2009 39

Domestic market for footwear is promising with large corporate entering the organized retail business.

• PercapitaconsumptionoffootwearinIndiaisvery low compared to other economies. However, the demand for footwear is rising with organized retail gaining more market share. Modern format Footwear retail is one of the most organised retail format in India and has 48% share in the total sales. Increasingly major players like Tata, Khadims, Reliance etc., are entering the retail business. Majority of the Indian footwear sales is the casual footwear followed by economy shoes. Premium leather shoes has a share of around 7%

Country Consumption(mn pairs)

Population(mn)

Per-capita pairs per person/year

USA 1939.7 290.3 6.68

Japan 584.4 127.2 4.6

EuropeanUnion 1666.5 380.2 4.38

Brazil 483 182 2.68

Thailand 144.4 64.3 2.25

China 2768.7 1286.9 1.71

India* 1800 1100 1.6

% Sales of footwear segments

Source: Deloitte Estimates

• Men’sfootwearaccountsforalmost50%ofthemarket.Around40%ofthemarketiswomen’sfootwearandtheremaining10%byChildren’sfootwear. Footwear has different segments like sports footwear, semi-formal/casual footwear, and formalwear and utility footwear.

Segments% Organised formats

2004 2005 2006 2007

Watches 39.60% 43.50% 45.60% 48.90%

Footwear 25.00% 30.30% 37.80% 48.40%

Health&BeautyServices 6.00% 7.60% 10.60% 14.30%

Consumer Durables 7.80% 8.80% 10.40% 12.30%

MobileHandsets&Accessories 6.50% 7.00% 8.00% 9.90%

Books,Music&Gifts 9.80% 11.70% 12.60% 13.40%

Casual

Economy

Premium Non Leather

Premium Leather

Sports / Active

40

Access to marketChina: The Foreign Invested Enterprises (FIEs) of China were predominantly from Hong Kong and Taiwan. FIEs control of access to the Western markets led to its dominance in exports from China.

• TheFIEsbroughtinthelinkageswiththewesternmarkets. FIEs exported 99.9% of their production whereas domestic firms exported 34.8% of their production in 1997.

– Inanumberoflabor-intensiveindustries,theFIEshares of industry sales seem to be substantial as well.In1995,FIEsaccountedfor30.7percentofsalesinfurnituremanufacturing,50.8percentingarments, and 54.1 percent in leather and related products.

• HongKongimportedandexportednearly1.4bnpairs of footwear from China in the year 1996 demonstrating that the FIEs from Hong Kong and Taiwan acted as a bridge between mainland China and the western world

• LargescaleinvestmentsbyFIEsenabledChinesemanufacturerstocatertothehighvolumeUSmarket

Factor Condition


Access to Market

Source:FDIandtheOpeningUpofChina’sEconomy,FrançoiseLemoine,2000IndianFootwearIndustry,2002CII,BarriersandOpportunitiesforPromotingTradeinEnvironmentally Friendly Products- A Study of India’s Leather Industry-2002

India: Indian companies were traditionally aligned to European market whereas the largest market was left untapped by Indian companies. Domestic market is also growing due to the rising income levels and low penetration of leather footwear.

• EuropeanbuyersoffinishedleatherfromIndiansuppliers, played a major role in diversification into leather products

– ThemainreasonistheirlocalproductionbaseinEurope had shut down or moved abroad.

– Smallorderquantitiesandmorefocusondesignenabled Indian leather industry to take advantage of the European footwear industry

Access to Technology: • Chinesecompanieshaveaccesstotechnologyowing

to the foreign investments which also brought in the necessary technology. However, in India as most firms are small and medium sized family owned businesses, access to technology is relatively very low.

• AcasetopointisthechemicalconsumptioninIndiantannerieswhichisabout25to30%higherthan international norms primarily due to the use of inefficient equipment and processes and the absence of recycling .

• ThespecificconsumptionofwaterinIndiantanneries is more than double of that in tanneries in the developed countries. The tanning units in Indiaconsumeatanaverage40ltr/sqftoffinishedleather as against 12-15 ltr/sq ft in the tanneries in developed countries

• WhileinstituteslikeCLRIandFDDIplayanactiverole in developing and dissipating technology to the industry, the firm structure has an important bearing on the adoption of technology.

August 2009 41

Firm Structure and Rivalry

Increasing number of FIEs/TVEsCluster based approach

42

Increasing number of FIEs / TVEsEvolution of TVEs and FIEs in the leather industry increased the market share of China in the world leathertradefromlessthan3%in1980tomorethan20%in1997

•Phase1:1978to1991: – DuringthisphasealargenumberofCollectively

OwnedEnterprises(COEs)/TownandVillageOwnedEnterprises(TVEs)wereformedwhichoperated in an optimal income sharing model

– importantfeatureofTVEswerethecommunity(town or village) control of firms

– TVEscouldovercometheobstaclesofaccessto capital through help from local (community) governments since there was a strong lending discriminationagainstPOEs

•Phase2:1992totillnow: – The number of foreign owned enterprises

increased significantly and in 1997 more than 53% of the output of leather were from FIEs

– Theforeignventuresuseimportedmachineryand chemicals with guaranteed standards. More important, these enterprises helped improve quality standards during the tanning process. In addition, they were willing to invest in technology improvement and staff training. The results of their efforts were usually reflected in better quality of their products and in the export share of their products (more than 99%)

– FIEs accounted for nearly 57% of the total exports from China in 2000

Shares of Ownership in Total Industrial Output

SOEs COEs POEs FIEs Joint Stock Companies

80

70

60

50

40

30

20

10

0

1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Source:CLE–CountryStudy–China;ForeignDirectInvestment and Industrial DevelopmentinChina,2004;FDIandtheOpeningUpofChina’sEconomy,FrançoiseLemoine

Ownership pattern in Chinese Leather companies Share of Sales in Chinese Leather Industry

1995 1997 2007

100

90

80

70

60

50

40

30

20

10

0

1995 1997 2007

3

17

68

12

10

17

63

10

7

24

62

7

StateOwnedEnterprises

Others

100

50

0

3

34

51

12

5

37

52

6

5

57

31

7

Collectively Invested

Foreign Investments

August 2009 43

Most of the organizations in this sector are proprietorships or partnerships traditionally owned by family members. Lack of investments has led to sub-optimality in size rendering them uncompetitive when faced with cost competition. Limited exposure to best practices in operations / management also hampers their growth.

•Atthefirmlevel,theIndianleatherindustryishighly fragmented.

– Asof2002,onatotalofnearly56,000units,only2% of the companies have revenues of more than Rs.50Crores.MostofthecompaniesareinRs.1-10croresegment

• Chinahas200factoriesproducing20000pairsaday (5 mn pairs annually) in a locality, India has only 3 factories of that scale.

• Nearly60%ofthecompaniesinIndiaareeitherproprietorships or partnership firms.

Lack of scale economies – Unwillingnesstoexpandthroughthedebtroute**

and limited exposure to the capital market has resulted in the companies relying primarily on internal funds for expansion opportunities

– Consequently,theindustryhasnotwitnessedsignificant capacity additions over the last decade

Lack of awareness on best practices** – MostoftheCEOsofleathercompanieslackthe

knowledge of latest management techniques and the best practices of other industries

Factor Condition


Management Structure

Source:DnB–IndianLeatherSector,CLE–CountryStudy-China,‘LEATHERS’–July2008,CLE,CII

**Interviews with Sectoral Experts

Structure of India Leather Sector India

Ownership pattern in Indian Leather sector

2%

1-10(Rs.Crores)

10-25(Rs.Crores),

25-20(Rs.Crores),

Morethan50Crores

Proprietorship

Partnership

Private Limited

Public Limited

5%

18%

75%

28%

2%

31%

39%

Source:DnB–IndianLeatherSector,CLE–CountryStudy-China,‘LEATHERS’–July2008,CLE,CII

**Interviews with Sectoral Experts

44

Recent trendsFirm Structures: JVs and FDI• AChennaibasedleadingleathermanufacturerand

exporter, specializing in finished leather, shoe uppers and full shoes, has struck a first-of-its-kind joint venturewithConceriaVirginiaItaly(CVI),a10-year-oldItalian tannery, specializing in leathers for shoes and leather goods, for the setting up of a six million sq. ft per annum state of- the-art leather manufacturing facility in Chennai to produce superior quality of bovine leather in India and cater to Indian market

• Oneoftheworld’slargestFashionaccessoriesmanufacturer LVMH ( Moet Hennessey Louis Vuitton) hadacquired20%stakeinHidesign(Indianleathergoods manufacturer)

• EntrepreneursfromTaiwanaresettingupplantsin Andhra Pradesh and Tamil Nadu for producing sports shoes

Global Sourcing • AMoUwassignedbetweentheEthiopianLeather

Industries Association (ELISA) and the Confederation of Indian Industries (CII) which makes it easier to source leather from Ethiopia. The Ethiopian leather industry has been manufacturing mainly wet blue leatherforthelast10to15years.Itisatypicalfeature of developing countries, as wet blue is the first stage of the leather value chain.

• IndiancompanieswouldhelpEthiopiaboostits leather exports and in turn Indian leather products made out of Ethiopian leather would find greater acceptability in global market because of its high quality

Fair Labour practices : • CompliancetostandardslikeSA8000isagrowingtrendamongtheleathercompanieswitharound20companies already accredited with the certification

• However,mostbuyers(brandownersandintermediaries) have their own standards similar to SA8000andtheyconductperiodicauditstoconfirmwhether their suppliers are confirming to the same

August 2009 45

Cluster Based ApproachMost investments in the leather industry in China happenedinafewprovinces.Operatinginaclusterbased approach and adopting a collaborative approach for marketing has allowed Chinese companies to deliver large volumes of footwear per order

• TheleatherindustryinChinaisclusteredinfive major provinces

– Zhejiang,Fujian,Guangdong,Sichuan and Chongqing

• Theproductionisconcentratedincitieslike:

– Wenzhou:Morethan4000companies&morethan400000employees

– Haining:Morethan2000companiespresentinthecity.Leathercitycomplexwith160000sqmandonline trade platform.

– Shiling:Leathercomplexwith2.5mnsqmareawithmorethan900tradersofleatherandmaterial,1200tradersforleatherproductsand300officesof companies

• Theproductsareboughtfromandsoldtothetradersin the local market

• Clusteringhassimplifiedthecomplexproductionprocesses into small steps and lowered technical and capital barriers to entry

• Thedivisionoflabordecomposescomplicatedfootwear products into numerous intermediate products which enabled many entrepreneurs without shoe making background to participate

– E.g.soleoffootwearisbrokendowntooutsole,mid-sole, insole, heel, sock lining, heel pad etc. Some companies focus on single operation like component assembly, etc

Chinese leather industry’s strength lies in these clusters where they process millions of pairs of footwear in a cost-effective manner

Collaborative approach to Marketing• Whenabulkorderisreceived,thereisadistribution

of orders among the eligible manufacturers / suppliers thereby meeting the commitment for exports.

Shared infrastructure and lower costs• Theclosegeographicallocationofsimilar

manufacturers within a cluster enables flexibility and capacity pooling to better handle uncertain demand

– Forexample,companiescanoutsourceordersorparts of orders that they may not be able to handle themselves to other firms with similar production capabilities within the same geographical area

– Suchanarrangementcreatesaperceptiontoapurchaser that its entire order is being fulfilled by the same producer.

Source: The Role of Clustering in Rural Industrialization: A Case Study oftheFootwearIndustryinWenzhou:May2007,ChineseLeatherIndustriesAssociation’swebsite,CLE–CountryStudy-China

Footwear Production zone in China

Chongqing Sichuan

Zhejiang

Fujian

Guangdong

46

Source:SupplyChainClusters:AKeytoChina'sCostAdvantage,LifangWu,XiaohangYue,andThaddeusSim-SupplyChainManagementReview,3/1/2006

UnlikeChina,thecollaborationanddivisionoflaboramong the companies is absent in India. Companies in India, are particular about their buyer’s information and rarely share them amongst themselves.

• Thoughthetanneriesandleatherfootwearproduction are concentrated in three major locations, there is no visible coordination among the players as compared to their Chinese counterparts

• Thishasresultedinsupplychainimbalances,highinventory and wastage across the supply chain, making it more disadvantageous for Indian firms to compete in the marketplace.

• Leatherindustryispresentinthesegeographiesformany years

– Chennaiclusterexportedleatherforthepast100years

– Kanpuriswellknownforitssaddleryproductswhose history traces back to the military cantonments of British era

Factor Condition


Cluster based approach

• Thecloseproximityofsimilarfacilitiesalsoallowsthese companies to share the investment costs of building facilities and other required infrastructure

– E.g.CommonEffluentTreatmentPlants(CETPs).• Withinthesupplycluster,shippingcostsbetween

suppliers and manufacturers are greatly reduced because of the close proximity of these firms.

• Withfrequentsmallshipmentsoccurringbetweenfacilities, in-transit inventories—which tie up working capital—are minimized.

• Thoughinternetisusedinfewbusinesstransactions,information is still being transferred through face-to-face interactions.

– Thegeographicproximityoffirmsinsupplyclusters provides favorable conditions for this kind of information transfer, which results in creating personal relationships (Guanxi in Chinese) and strengthening community ties.

Footwear Production zones in India

Source:IBEF–2006,Anecdotalreferences

AgraKanpur

Kolkata

Chennai

Ranipet,Ambur,Vaniambadi

Unlike China, the collaboration and division of labor among the companies is absent in India. Companies in India, are particular about their buyer’s information and rarely share them amongst themselves.

August 2009 47

Primary SurveyLessthan50%oftheorganizationssurveyedcollaboratewiththecustomersontacticalareaslikedemandplanning,transportationplanningandproductionplanninginitiatives.Organizationswhocollaboratewithcustomershavereported benefits

Customer collaboration and benefits achieved

% of companies with medium to high collaboration

Benefits Gained

Strategicplanning

Demand planning

Promotion planning

Production planning

Inventory replenishment

Transportation planning

Costreduction

Qualityimprovement

100.%90.%80.%70.%60.%50.%40.%30.%20.%10.%

.%

5

4.5

4

3.5

3

2.5

2

1.5

1

Strategicplanning

Demand planning

Promotion planning

Production planning



Costreduction

Qualityimprovement

Indian Leather and Footwear sector Scale1 = no benefit3 = moderate benefit5 = very high benefit

48

Similarly,onlyabout50%ofthecompaniessurveyedhaveengagedinacollaborationwithsuppliers.However,theyhave not achieved significant benefits. These levels of collaboration have resulted in delayed deliveries from suppliers. Lessthan20%ofthecompaniesreportedon-timedeliveriesofover70%fromsuppliers

Supplier collaboration and benefits achieved


100.%90.%80.%70.%60.%50.%40.%30.%20.%10.%

.%

Strategicplanning

Demandplanning

Promotionplanning

Productionplanning

Inventoryreplenishment

Transportationplanning

Costreduction

Qualityimprovement

Benefits Gained

Strategicplanning

Demandplanning

Promotionplanning

Productionplanning



Costreduction

Qualityimprovement

5

4.5

4

3.5

3

2.5

2

1.5

1

Indian Leather and Footwear sector

60.%

50.%

40.%

30.%

20.%

10.%

.%

%ofOntimedeliveries

Number of on-time deliveries/total number of deliveries (in %)

% o

f com

pani

es

<50% 50-60% 60-70% 70-80% >80%

Industry Supplier Delivery %

Scale1 = no benefit3 = moderate benefit5 = very high benefit

August 2009 49

Lack of collaboration with the suppliers and customers has resulted in poor visibility along the supply chain

Information availability to understand supply chain performance

Due to poor visibility in the value chain (customer and supplier), Indian leather companies are fraught with inefficiencies in terms of higher inventory and delayed deliveries. Given the nature of the industry and export destinations, these typically result in high levels of obsolescence

On-timedeliveryformostofIndiancompaniesislessthan70%

Over50%oftheIndiancompanieshold3–6monthsstock on an average

5

4.5

4

3.5

3

2.5

2

1.5

1Deliverydates

Supplierinventory

Suppliercapacity

FGInventory

Productionschedule

Capacity Productcost

Productprofit

Customerforecast

Customerinventory

Customerprofitability

CustomerService

Customerretention

Industry On Time Delivery

%ofOntimedeliveries

Percentage of shipments that meet customer request date (for the different peer groups

% o

f com

pani

es

60.%

50.%

40.%

30.%

20.%

10.%

.%

<70% 70-80% 80-90% >90%

Inventory Turns

(Annual cost of goods sold) / (average total on hand inventory)

Inventory turns

% o

f com

pani

es

60.%

50.%

40.%

30.%

20.%

10.%

.%

<2 2-4 4-6 6-8 >8


Indian Leather and Footwear sectorScale1 = no information available 3 = some information available 5 = information is readily available

50

Indian companies are not flexible to meet the dynamic nature of the business like changing product mix, volume etc owing to low levels of collaboration along the supply chain

Flexibility: Current capability and importance in 3 years.

Current Capability

5

4.5

4

3.5

3

2.5

2

1.5

1Product mix Production

volumeCustom orders

Change in prod. spec.

Delayed differentiation

Make/buy decisions

Shift manufacture load

Scale1 = significant disadvantage3 = equivalent capability5 = strong advantage


Importance in Next 3 Years

5

4.5

4

3.5

3

2.5

2

1.5

1Product mix Production

volumeCustom orders

Change in prod. spec.

Delayed differentiation

Make/buy decisions

Shift manufac. load

Scale1 = not important5 = very important

AdoptionoftechnologiesthataidmaterialandinformationflowislowinleathersectorinIndia.Lessthan50%ofthefirmshaveanenterpriseapplication(“ERP”)fortransactionprocessingandmanagementinformation.Oneoftheprimaryreasonscouldbethesizeofinvestmentsinvolvedinimplementation and maintenance which could be prohibitive for the firms in this industry given their size

Technology: implementation and benefit

100.%90.%80.%70.%60.%50.%40.%30.%20.%10.%

.%

Also, most of the firms do not measure basic parameters for competitiveness like• ProfitabilityofvariousSKUs• Manufacturing

non-conformance rate• Outboundfreightcost,etc.

PDM/PLM EDI Trading Exchanges

e Procur-ement

ERP Demand planning

APS QMS WMS TMS CRM

% of companies with some to extensive implementation

Indian Leather and

Footwear sector

August 2009 51

Supporting Industries

Proximity of the industries/information flow

52

Numerous leather associations act as a bridge between industryandgovernment,academic&researchinstitutions

• Chinahasawelldevelopedcomponentsandmachineryindustry.In2006,Wenzhoucluster alone had:

– 200footwearmachinerymanufacturers – 380footwearsolemanufacturers – 180footwearlastmanufacturers – 100footwearaccessoriesandornaments

manufacturers – 50designstudiosandnumeroustrainingschools

• ChinaLeatherIndustryAssociation(CLIA)hasdevelopedandregisteredatrademarkcalled‘GenuineLeather Mark’ (GLM) which is internationally accepted

• Therearenumerousassociationsforleathersectorin various provinces in China which acts as a bridge between industry and government, communicating theindustry'sintereststoofficialssothattheyaretaken into consideration when industrial policies and economic plans are formulated.

• Theseassociationsareenvisagedtobeamajorcontact point with academic and research institutions, to help the industry identify and groom the right management and technical personnel.

• AmajorityofthelargefirmsinChinahaveinternaldesign centers. Enterprises with a total investment of over Rmb 5 mn are usually equipped with in-house product and technology design, as well as quality control teams. Many of them even appoint foreign and domestic experts as well as academic and research institutions to provide technical advice and product development services.

Supporting industries like equipment and footwear components industry are not well developed in India leading to dependence on import for the same

Footwear Components Industry:• Thesizeoffootwearcomponentindustry(which

produces components like ornaments, buckles etc) is very small in India. The components industry is completelyde-reservedsince2008.However,mostof the companies still operate in the small scale levels and the capacity addition has been very limited.

• Largequantitiesoffootwearcomponentshavetobeimported from China. This is explained as one of main reasons for India focusing more on men’s footwear while China and other competing countries export more women’s footwear

• Demandforwomen’sfootwearconsumptionisdrivenby higher per capita usage in the developed countries as compared to men. The per capita consumption is 4~5 pairs per woman compared to 2 pairs per man in the developed countries.

Equipment Suppliers: • Almostallthemachinesusedforleatherprocessing

are imported. Local manufacturers are perceived to produce poor quality machines.

• Giventhehighcostofimportedmachineryonlylargesized firms access them leaving a majority of the leather industry using outdated / poor quality local machines

Chemical Companies: • Chemicalcompaniesplayanimportantrolein

process changes.• Mostoftheworld’sleadingproducersoftannery

chemicals are present in India and have facilities in major clusters (where specific processes to meet the requirement of client tanneries are developed).

• Thesecompaniesprovidedimportanttechnicalsupport when Indian tanneries were faced with the task of substituting hazardous chemicals (PCP and Azo dyes).

Source:http://info.hktdc.com/imn/02100301/leather003.htmaccessedon18.09.08

Source:IndianLeatherIndustry–ProspectsandProblems–CLE, Anecdotal evidences from Indian Footwear Components ManufacturersAssociation,BarriersandOpportunitiesforPromoting Trade in Environmentally Friendly Products- A Study of India’sLeatherIndustry–May2002

August 2009 53

Institutions like CLRI and CLE have been instrumental in the growth of Indian leather industry. However, there is a felt need for more training institutions to meet the export targets by 2011.

Organization Roles

Central Leather Research Institute (CLRI) Leather-related research, dissemination of new practices and training, testing, and certification facilities to firms

• MemorandumofunderstandingwiththeUniversityofNorthamptonintheUnitedKingdom to explore new areas of research in leather

• PlayedakeyroleinsettingupCETPsduringtheshuttingdownofalltanneriesandtackletheproblemofAZOandPCPdyesbanbyGermanyduring90s

Council for Leather Exports (CLE) Promote leather exports, gather and disseminate market information to the industry, to run trade shows abroad

Footwear Design and Development Institute (FDDI) Train the professional manpower for the industry, Industrial Consultancy, Research and Development and Training of industry professionals

All India Skin and Hide Tanning and Merchants Association and numerous other associations

Major association of leather and footwear manufacturers who act as a bridge between the Government, CLE and the members

Polytechnics and ITIs providing training in leather and Footwear manufacturing

Large number of polytechnics and ITIs provide training. However, given the demand for skilled labor there exists a shortage of the same necessitating more training institutions


Supporting Industries

Source:IndianLeatherIndustry–ProspectsandProblems–CLE,Anecdotalevidences,BarriersandOpportunitiesforPromotingTradeinEnvironmentallyFriendlyProducts-AStudyofIndia’sLeatherIndustry–May2002

54

Government Support

Economic reforms & IncentivesOther policies towards FIEs

August 2009 55

Reforms, Incentives and PoliciesChinese government favored FIEs with their flexible policies, reduced tax structure which helped in FIEs gaining more share in the export of leather products.

• SpecialpreferencetreatmenttoHongKong,Chinese and Taiwanese to travel and invest in China (Morethan60%oftheforeigninvestmentinChinabetween 1992 and 1998 is by Hong Kong and Taiwan investors)

– 2yearstaxexemptionforFIEfromthedatetheymakeprofitand50%taxforthenext3years

– IntheExportProcessingZones,Corporatetaxwasonly 15% while tax rate at other places was 55% fordomesticfirmsand40%forFIEs.

– Forthepromotionofexports,additional10%taxexemption is provided for firms which export more than70%ofitsproducts

– Exporttaxrefundof15~17%forleatherproductstill2004and13%till30-June-2007

– DirectfinancialsubsidiesforResearchandDevelopment(R&D)expenditureonspecifiedScienceandTechnology(S&T)projectshaveincreasingly become an instrument of industrial policy.

• “Fiveconnectionsandoneleveling”–Connectingroads, Telecommunications, Water, Electricity and Portsandlevelingofsites–werethemainmethodsused to attract foreign investment

– Freeorhighlysubsidizedland – Normallythelandissoldatacostlessthan

the development cost. In most of the local government controlled areas it was close to zero

– Subsidiesforelectricityandotherutilities – Buildingofroadsandotherinfrastructureprojects

supporting the factory sites, if necessary

Streamlining of government structures and procedures• Delegationtolocalauthoritiesthepowertoapprove

foreign investment • One-stopshoppingcentreforgettingallapprovals

within a few days for foreign investment into China

Source: Developing Countries, China and Economic Institutions, 2000,BargainingPowerandForeignDirectInvestmentinChina:Can1.3BillionConsumersTametheMultinationals?August2002,TheMixedReforms–AgeneralizationandcomparativecasestudyontheETREsystemsofChinaandtheEU–2005,TheChinaCircleEconomics and Technology in The PRC, Taiwan and Hong Kong - Naughton, 1997

56

Reservation of the sector for SSI led to fragmentation of the industry preventing the achievement of economiesofscale.Thedereservationin2001and100%FDIisexpectedtobringscaleeconomiesintheleather industry

•During1950sand1960s,India’spolicieswereaimedat employment generation and foreign exchange while reserving the sector for small and medium enterprises.

• Governmentconstitutedacommissionin1972toexamine ways to improve the leather sector

– Thecommissionrecommendedtherestrictionsof exporting semi-finished leather and promote exports of value added leather products

– Thegovernmentimposedexporttaxontheexportof semi-finished leather

• Firstphaseofmodernization: took place from 1973 to1980withnumberofincentivesand support programs

– AcashcompensatoryschemetocompensateIndian exporters for the export disadvantages they faced vis-à-vis their competitors abroad (South Korean Taiwan, Latin America)—with respect to high interest rates, high income tax and taxes on imports

– Thegovernmentalsoprovidedanairfreightsubsidy of 15-22% on leather exports, excise duty exemption for exports of final products, and a duty drawback scheme that paid back firms excise and customs duties paid on the import of raw materials (such as components, packaging materials, etc) used in the manufacture and export of finished products

•Secondphaseofmodernization: from 1979 – In1979,theKaulcommissionrecommendedto

reduce import duties on all tannery, finishing, footwear, and other leather goods machinery to an uniform rate of 25%.

– Inthemid-1980s,upontherecommendationofthe Pande Commission, the government removed all duties on the import of hides and skins, wet blue and crust leather

•ThirdPhase:after2000 – De-reservationandDe-licensingofseveralleather

goodsfromtheSmallScalesectorin2001 – DutyDrawbackscheme,3%DutyFreeImport

Scheme, Export Credit Passbook (ECPB) and various other schemes

– 100%FDIallowedinleatherandfootwearsectorfrom2002

– FocusMarketsandFocusProductsscheme(cashbackof2.5%oftheFOBvalueoftheproductsexported to the markets / cash back of 2.5% of theexportFOBvaluetothefiftypercentofexportturn-over of notified products)

Source: CLE website, Trade Liberalization and the Restructuring of Tamil Nadu’s Leather Sector: Coping with liberalization’s New Environmental Challenges and Lessons from Prior Episodes of Adjustment-2001

August 2009 57

The Government of India is supporting the leather industry in enhancing its competitiveness through upgradation and modernization by providing financial assistance

• DepartmentofIndustrialPolicyandPromotion(DIPP)provides a comprehensive scheme for modernization and technology up gradation in all the segments of the Leather Industry, from tanneries, footwear, footwear components, saddlery, leather goods and garments.

• Thisschemeiscalled“IntegratedDevelopmentofLeatherSector”(IDLS).Itwasstartedin2002andwillbecontinuedtill2012.

• GovernmenthadsanctionedRs290Croresforthis project and will be implemented through two ProgramImplementationUnits(PIU)namelyCLRI and FDDI.

• Here,financialassistancewillbeprovidedtotheextentof30%ofthecostofplantandmachineryforSSIand20%ofcostofplant&machineryforotherunits (i.e. non-small scale units) subject to a ceiling ofRs.50lakhforbothcategoriesfortechnologyup-gradation/modernization and/or expansion.


Government Support

Source: CLE website, CLRI Website, Trade Liberalization and the Restructuring of Tamil Nadu’s Leather Sector: Coping with liberalization’s New Environmental Challenges and Lessons from Prior Episodes of Adjustment-2001

58

India scores better than China on costs of labor. In other key factors like infrastructure, cluster based approach and the presence of supporting industries India needs to bridge the gap.

Elements of Diamond Framework

Parameterss Importance China India

Factor Conditions

Labor Cost

Infrastructure

Access to Capital

Raw Material Availability

Demand Condition Access to Market

Firm Structure and Rivalry

Management Structure

ClusterBasedApproach&Collaboration

Supporting Industries Presence of supporting

Government Support EconomicReforms&Incentives

Strong Weak Positive Negative Neutral

TheCLEhadsetanexporttargetofUSD7bnby2011.Basedoncurrentgrowthratesandsegmentcontributions, exports would be able to reach a target of USD5.2bnintheyear2011,ashortfallofabout25%in the next 3 years.

2006-07 2007-08 Growth % YoY 2008-09 2009-10 2010-11

Finished Leather 724 766.93 5.93% 812.41 860.58 911.61

Footwear 1017.07 1209.72 18.94% 1438.86 1711.41 2035.57

Footwear Components 219.84 266.11 21.05% 322.12 389.92 471.98

Leather Garments 309.91 343.99 11.00% 381.82 423.81 470.41

Leather Goods 706.28 784.95 11.14% 872.38 969.55 1077.55

Saddlery and Harness 82.33 105.81 28.52% 135.99 174.77 224.61

Total(mn$) 3059.43 3477.51 3963.57 4530.03 5191.73

Source: CLE data

• Thegrowthratefortheprojectionisassumedasthegrowthratesobservedbetweentheyear2007-08vs.2006-07

August 2009 59

Scenario Analysis Scenario1: Meeting the export targets with the current composition of the portfolio

Iftheexporttargetfortheyear2011aretobeachievedwith the share of sub-segments being maintained, growthratesrequiredarebetween20%and30%for

all sectors. Currently, other than saddlery and harness which accounts for only 2.7% of the export share, all othersegmentshaveagrowthratelessthan20%.

Hence,toachievethetargetfortheyear2011,several interventions at the policy, sectoral and firm levels are required.

Current composition

2007-08 Current Growth rate

Projected Growth rate

2008-09 2009-10 2010-11

Finished Leather 23.7% 766.93 5.93% 29.3% 991.37 1281.49 1656.52

Footwear 33.2% 1209.72 18.94% 24.4% 1504.50 1871.12 2327.06

Footwear Components 7.2% 266.11 21.05% 23.6% 329.02 406.81 503.00

Leather Garments 10.1% 343.99 11.00% 27.3% 437.79 557.16 709.08

Leather Goods 23.1% 784.95 11.14% 27.2% 998.56 1270.29 1615.97

Saddlery and Harness 2.7% 105.81 28.52% 21.2% 128.24 155.42 188.37

Total(Mn$) 3477.51 4389.48 5542.30 7000.00

Source: CLE data

Proposed composition

2007-08 Current Growth rate

Projected Growth rate

2008-09 2009-10 2010-11

Finished Leather 15.0% 766.93 5.93% 11.0% 851.60 945.61 1050.00

Footwear 45.0% 1209.72 18.94% 37.6% 1664.28 2289.65 3150.00

Footwear Components 7.0% 266.11 21.05% 22.6% 326.17 399.78 490.00

Leather Garments 10.0% 343.99 11.00% 26.7% 435.91 552.39 700.00

Leather Goods 20.0% 784.95 11.14% 21.3% 951.93 1154.43 1400.00

Saddlery and Harness 3.0% 105.81 28.52% 25.7% 132.97 167.10 210.00

Total(Mn$) 3477.51 4362.85 5508.96 7000.00

Scenario2: Meeting the export target with 45% share of leather footwear and 15% of finished leather

• InIndia’scurrentexports,finishedleatheraccountsfor 23.7% whereas in global trade it is only 16%

• Similarly,footwearexportsconstitutesabout33.2%of Indian exports, whereas in global trade its around 66%

– FormalanddressshoesdominateIndianexports,while the global trend is towards casual and comfort shoes

– Indiaproducesmoremenshoeswhereaswomenand children shoes is the bigger market

• Itisassumedthatfootwearexportsincreasesto45% in the next 3 years and finished leather exports reduced to 15% of the total exports inline with the global trends

• Inthiscase,thegrowthratesrequiredforfootwearand finished leather are 37% and 11% respectively which requires large capacity additions and interventions from the government

Source: CLE data

60

LeatherindustryrequiresaninvestmentofoverRs.7000CrorestomeettheexporttargetofUSD7bnby2011set by CLE. It also needs to add nearly 5 lakh jobs to meet the target

• Thereisapotentialforaddingover5lakhemployeesin this sector in the next few years.

• Thepotentialforemploymentisacrossallskills: – semi-skilledandunskilledlaborers-92%; – technicalsupervisors-7%; – entrepreneurs,seniormanagersand

technologists - 1%.

Sector Required Manpower Addition (Nos)

Required Investment(Rs. Crores)

Tannery 100000 4000

Footwear 300000 3000

Leather Garments 45000 162

Leather Goods 52000 130

Source:CII,IndianLeatherExports–ProspectsandProblems-CLEAnecdotal references

Key conclusions and recommendations

Improving cost competitiveness through value chain efficiencies:• Implementingbestpracticesatafirmlevelandatthe

sectoral level through cluster based approach, setting up cross-industry clusters and support them through governmental interventions on infrastructure like port clearances and power.

Promoting footwear component clusters near leather clusters:• Promotionoffootwearcomponentindustriesnear

the leather and footwear clusters or incentives for building scale for the component industries would boost the leather sector.

Focus on Training: Increasing the capacity of training institutes• Theexistingcapacitiesofthetraininginstituteswould

not be sufficient to meet the employment generation projectionsfor2011.

Increasing the tanning capacity :• India’scurrentcapacityoftanneriesisaround2bn

square feet whereas to achieve the export target of 7bn$in2011,around4bnsquarefeetoffinishedleather is required.

Attracting Foreign Direct Investment:• TheleatherandfootwearsectorhadseenonlyRs.200CroresofFDI(Whichisonly0.15%ofIndia’stotalFDIfrom1991to2005).

• FDIbringsinscale,efficiencyinoperationsandlatestmanagement practices for the industry to benefit.

August 2009 61

62

Improving cost competitiveness through value chain efficiencies:LearningfromtheAutoClusterofUNIDO

• Theobjectiveoftheprogramistostrengthenthecapacity of Indian small and medium auto component suppliers to meet the requirements of vehicle manufacturers and, to enhance their productivity and performance levels so as to facilitate their inclusion in the domestic as well as the global automotive supply chains.

Improving cost competitiveness through value chain efficiencies:

Initiative Likely Stakeholders Expected Results

Promoting a cluster based approach among the companies.

Organizationscanbegroupedintosmallteamswithinand across regions

Ideally, one or two organizations can be aligned to a cluster in a mature industry like automotive/auto component and learn from the leaders in planned cost declines and efficiencies. These organizations can then be leaders who disseminate the learnings to other members through leather specific clusters

CII,CLE,UNIDOandcompanies in the clusters

Easy transfer of the best practices among the companies which improves their operational efficiencies, costs and collaboration with customers and suppliers

OrganizationslikeUNIDOareconductingprogramsspecifically targeted at the leather sector with initiatives like “cluster twinning programs” where best practices of the global leather industry ( in this case - Italian) are disseminated to the companies in the leather sector ( CLE –Leathers–June2008)

Implementations of best practices in manufacturing technologies (value engineering) and manufacturing (lean manufacturing, costing systems etc.)

UNIDO,CIIsupportedbyCLRI, CLE

Operationalperformanceofthecompanieswillimprovewhich results in better quality and delivery

Promoting visits by leaders of cluster organizations to other industries to understand management and financial practices

UNIDO,CLEandIndustryAssociations

Adoption of best practices from other industries helps in improving operational and financial efficiency

Simplify clearance procedures for leather products in the Seaports and Airports

State Level Industries Department, Customs department, CLE

Adherence to delivery schedules by the companies results in higher customer satisfaction

– Phase1oftheprogrammewastakenupin1999inthe western region as a demonstration programme inwhich20companiesparticipated.About40companiestookpartinPhase2(2003-2005),andthe programme now in Phase 3 has 58 companies participating across the country.

August 2009 63

– Theseindicatorsaredefectsinpartspermillion(ppm), labor and overall productivity, inventory turnover, delivery schedule achievement, space utilization, etc. According to the counselors, a substantial difference is noticed within a year, or even within a few months. The benefits are also in terms of the reduction of energy, wastage, absenteeism, lead-time for production.

• Thebenefitsoftheprogrammeareseenina)reduction in absenteeism, b) improvements in work place and work practices, c) total employee involvement, d) reduction in number of accidents, e) decline in in-house rejections, f) reduction in customer returns, g) reduced inventory levels, h) reduction in set up time, i) fewer machine breakdowns, and j) improvement in productivity. According to Automotive Component Manufacturers Association, the intangible benefits have been even higher–measuredintermsofacleanworkingenvironment, improved relations between the management and employees, transformation in work culture, openness and the desire to learn and share, and trust and respect for each other.

Source: Learning, Innovation and Competence Building in SMEs: The CaseofIndianAutomotives–NeelamSinghUNIDO

– Oneclustercomprises8to10companies.Grouping is dependent upon the geographical location of the companies selected, and for each cluster, national engineers (counselors) having expertiseinTPM/TQMetcareappointed,workingunder the guidance of senior counselors and industry experts. The national engineer visits the companies and helps translate the training inputs.

– In-planttrainingandshopfloorinterventionsareprovided in the following modules: employee involvement(Kaizens–Qcircles,safety);5S (maintenance of model machine, daily management discipline, waste elimination); quality management (Poka Yoke, process capability, standards); inventory management (containerization, SMED, red tag); productivity improvement ( multi-machine manufacturing, flow manufacturing); and sustenance (alignment with cluster activities).

• Dataonkeyperformanceindicatorspertainingtoquality, cost and delivery is presented by member firms at the periodic review meetings and compared against the baseline survey

The benefits of the programme are seen in a) reduction in absenteeism, b) improvements in work place and work practices, c) total employee involvement, d) reduction in number of accidents, e) decline in in-house rejections, f) reduction in customer returns, g) reduced inventory levels, h) reduction in set up time, i) fewer machine breakdowns, and j) improvement in productivity.

64

Promoting footwear component clusters near leather clusters:


Promoting footwear component clusters near leather clusters

Government of India, CLE, companies

Cluster based approach can be organized for components also.

Incentives can be provided for the component industries to add capacities resulting in increase in economies of scale / consolidation of the industry

Focus on women’s footwear: Availability of components will allow Indian companies to focus on women’s footwear which is the larger market compared to men’s footwear

Focus on Training : Increasing the capacity of training institutes and enable training by organizations


Increase the capacity / number of training institutions in the leather and footwear sector

Government of India, CLRI, FDDI etc Trained personnel to fulfill the projected demand of 5 lakh jobs

Specific training and certifications in the “hot skill” areas of toe lasting, cutting etc

CLRI, Industry Associations To reduce the shortage in skilled operations which provide the desired value addition and product premium

To enable fair labour practices, costs of certificationslikeSA8000whichalsoenables access to key customers and markets and associated costs of training by the organizationscanbesubsidized–withaceiling linked to the number of employees

State level Industries Department, CLRI Companies will provide more training to the employees which leads to improvement in quality, productivity etc

Training centers in the clusters. Skilled and Semi-skilled operations

CLRI, CLE and companies in the cluster Training centers in the clusters can disseminate latest product requirements and can provide trained manpower to the necessary companies

• Commonstandardsinallareasofmanufacturingcanbeimplementedinaphasedmanner.E.g.normsofproduction, common salary levels in a cluster

• E.g.Followingacommonsalarybandinaclusterwouldhelpinreducingtheattrition.Oneofthereasonsforhighattrition levels is the significant difference in salaries between various companies in the same area for the same job (e.g. cutting, stitching etc)

August 2009 65

Increasing the tanning capacity:


Providing financial assistance/subsidies (over current levels) to modernize the existing tanneries and thereby building scale

CLRI,UNIDOandStateLevelIndustries Department

Increases the availability of finished leather to meet the export target for2011

Incentivsing environment friendly initiatives to promote modernization and enabling cost competitiveness: For example, cost of treating the wastewater can be subsidized to the tanneries with conditions to upgrade the machinery

State Governments Increased motivation for modernization thereby improving efficiencies and building scale

66

In the short term: Typical steps to be undertaken by the firms to survive the downturn

• Someofthestrategiesfollowedbythecompaniestosurvive / mitigate the risks in the downturn are:

– Optimizemanufacturingandsupplychainnetworks

Source: Deloitte Research

• Someofthemethodsofreducingcostsarelistedbelow:

Cost Imrovement levers Description % savings*

Spend reductionand Demandmanagement

Focuses on strategic sourcing, demand management, and tax management to aggressively reduce external spend

10-20%

Business ProcessRedesign

Focus on streamlining business processes via simplification, elimination, or outsourcing

5-10%

Infrastructure RationalizationFocus on IT and real Estate portfolios, projects, platforms, and support rationalization

15-25%

Service Delivery Modeland organizationAlignment

Focuses on re-aligning staff based on method of adding value and realtionship to business

10-30%

Business ModelRedesign

Shift to a more cost-efficient business model 20-30%

* relative savings estimates based on Deloitte experience.

TacticalImprovements

Strategic,Structural

Improvements

– Reducematerialcoststhroughsourcingstrategies – “Variabilize”coststructurethroughtollingand

outsourcing – Challengevaluecontributionofeachbusinessunit

and plan accordingly – Rethinktheoperatingmodeltoreducecostand

business complexity

Attracting Foreign Direct Investment:


Leather parks with all amenities constituting only export organizations to be initiated

Government of India / state governments

Foreign companies bring in market access and efficiencies of scale and scope. They in turn force Indian companies to improve their operational efficiencies. The dynamics of the industry would therefore undergo a change:

Consolidation: There may be a consolidation of the companies which brings Collaboration: Collaborative approach between the players to improve cost competitiveness

Tax benefits and incentives in line with global competitors (like China) to be provided to enable FDI

Government of India / state governments

Assist Indian companies in identifying partners of choice for strategic partnerships

Government of India

August 2009 67

Primary Survey• Theresponsesfrom12companies(asdetailedinthetermsofreference)werecollectedintheprimarysurvey

• India’sleatherclustersarepresentinSouth,NorthandEastzoneswhichtogethertotal87%ofthemanufacturingfacilities in India. The Central and West zones together contribute only 13% of the total number of units. Hence, the distribution for the study focused significantly on the South, North and East zones.

Sector No. of Companies

Tannery 3

Footwear / Footwear components

6

Leather goods 1

Leather Garments 1

Saddlery and Harness 1

Region No. of Companies

South 6

North 3

West 1

East 2

Annexure: "Results of the Primary Survey"

Annual Revenue (Rs. Crores) No. of Companies

<20 2

21–50 4

51-100 4

101-200 1

>200 1

Approximate number of employees No. of Companies

<100 1

101-500 4

501–1000 5

>1000 2

68

Business performanceSupply chain prioritiesCollaborationVisibilityFlexibilityProduct innovationOperational excellenceHuman resourcesInfrastructure

August 2009 69

Business PerformanceIndustry growth rate, new geographic markets and new products are expected to drive revenue for Indian leather industryintheimmediatefuture.JVsandM&Aareseenasthenextsetofdrivers

Revenue growth drivers - next 3 years

Indian Leather and Footwear sector Scale1 = not important5 = highly important

5

4.5

4

3.5

3

2.5

2

1.5

1

Industry growthrate

Economy New geographicmarkets

New marketchannels

New products /services

Joint ventures /alliances

Merger /acquisition

70

Most of the Indian companies performed well in shareholders return, revenue growth, Customer satisfaction and retention of customers. This is also reflected by the fact that Indian exports exceeded the target set for the year 2007-08 by 14%

Business performance metrics

5

4.5

4

3.5

3

2.5

2

1.5

1

Return to

shareholders

Revenue

growth

Market share Profitability ROA Customer

satisfaction

Customer

loyalty


Scale1 = Poor Performance3 =met goals5 = Exceptional Performance

Performance against goals


Peer group distribution of profitability percentage: EBIT(earnings before interest and taxes) in last fiscal year.Negative

(net loss)

Break Even (no

profit/no loss)

Upto5%

profit

5-10%profit 10-15%profit 15-25%

profit

Over25%

profit

Regional Profitability

60.%

50.%

40.%

30.%

20.%

10.%

.%

The profitability of Indian companies were lower due to rising labour costs and input costs. Profitability of 50% of the companies were 5% or less

Profitability

August 2009 71

Supply Chain PrioritiesImproving Customer service, manufacturing lead time and productivity and time-to-market seems to be the key priorities of Indian companies.

5

4.5

4

3.5

3

2.5

2

1.5

1Product

innovationTime-to-

market

Sourcing Quality Manufa-

cturing

flexibility

Manufa-

cturing

productivity

/ cost

Manufa-

cturing

lead time

Logistics Customer

service

Supply

chain cost


Scale1 = not important5 = highly important

Supply Chain Priorities

Adoption of technologies that aid material and information flow is low in leather sector in India. Less than50%ofthefirmshaveanenterpriseapplication(“ERP”)fortransactionprocessingandmanagementinformation.One of the primary reasons could be the size of investments involved in implementation and maintenance which could be prohibitive for the firms in this industry given their size

Technology: implementation and benefit

Also, most of the firms do not measure basic parameters for competitiveness like

• ProfitabilityofvariousSKUs• Manufacturing

non-conformance rate• Outboundfreightcost,etc.

% of companies with some to extensive implementation


PDM/PLM

EDI Trading Exchanges

Procurement ERP Demand planning

APS QMS WMS TMS CRM

100.%

90.%

80.%

70.%

60.%

50.%

40.%

30.%

20.%

10.%

.%

72

CollaborationLessthan50%oftheorganizationssurveyedcollaboratewiththecustomersontacticalareaslikedemandplanning,transportationplanningandproductionplanninginitiatives.Organizationswhocollaboratewithcustomershavereported benefits

Customer collaboration and benefits achieved


5

4.5

4

3.5

3

2.5

2

1.5

1

Strategicplanning

Demand planning

Promotion planning

Production planning



Costreduction

Qualityimprovement

Benefits Gained



Strategicplanning

Demand planning

Promotion planning

Production planning



Costreduction

Qualityimprovement

100.%90.%80.%70.%60.%50.%40.%30.%20.%10.%

.%

August 2009 73

Similarly,onlyabout50%ofthecompaniessurveyedhaveengagedinacollaborationwith suppliers. However, they have not achieved significant benefits. These levels of collaborationhaveresultedindelayeddeliveriesfromsuppliers.Lessthan20%ofthecompaniesreportedon-timedeliveriesofover70%fromsuppliers

Supplier collaboration and benefits achieved

100.%90.%80.%70.%60.%50.%40.%30.%20.%10.%

.%

Strategicplanning

Demandplanning

Promotionplanning

Productionplanning



Costreduction

Qualityimprovement


Strategicplanning

Demandplanning

Promotionplanning

Productionplanning



Costreduction

Qualityimprovement

Benefits Gained

5

4.5

4

3.5

3

2.5

2

1.5

1


Scale1 = not important5 = very important

74

Number of on-time deliveries/total number of deliveries (in %)


Industry Supplier Delivery %

60.%

50.%

40.%

30.%

20.%

10.%

.%

%ofOntimedeliveries

% o

f com

pani

es

<50% 50-60% 60-70% 70-80% >80%

VisibilityLack of collaboration with the suppliers and customers has resulted in poor visibility along the supply chain

Information availability to understand supply chain performance

Indian Leather and Footwear sector Scale1 = no information available3 = some information available5 = information is readily available

5

4.5

4

3.5

3

2.5

2

1.5

1

Deliverydates

Supplier Visibility Internal Visibility Customer Visibility

Supplierinventory

Suppliercapacity

FGInventory

Productionschedule

Capacity Productcost

ProductProfit

Customerforecast

Customerinventory

Customerprofitability

Customerservice

Customerretention

August 2009 75

FlexibilityDue to the poor visibility of the supply chain and low levels of collaborations with in the supply chain, Indian companieshavenotcreatedcapabilitiesinflexiblesupplychains.Organizationshavenotindicatedcapabilitiesinconcepts like delayed differentiation, make/buy decisions and abilities to rapidly change product mix and volumes

Flexibility: Current capability and importance in 3 years.

Current Capabilities

Importance in Next 3 Years




5

4.5

4

3.5

3

2.5

2

1.5

1Customorders

Change inprod. spec.

Delayeddifferentiation

Make/buydecisions

Shift manufac.load

Product mix Productionvolume

5

4.5

4

3.5

3

2.5

2

1.5

1

Customorders

Change inprod. spec.

Delayeddifferentiation

Make/buydecisions

Shift manufac.load

Product mix Productionvolume

76


Product InnovationThough only a few Indian companies have their own design studios, innovation in developing the product is high. Companies are also focusing on improving their time-to-market capabilities

Product innovation: capability and priority

Innovation Priorities

5

4.5

4

3.5

3

2.5

2

1.5

1

Product innovation Time-to-market

Current Capabilities

5

4.5

4

3.5

3

2.5

2

1.5

1

Product innovation Time-to-market

August 2009 77

Operational ExcellenceIndian companies show implementation of major functions like forecasting, order management, manufacturing etc. ButonlyafewcompaniesareinvestinginoperationalexcellenceinR&D.Thosewhohaveinvestedhaveachievedhigher benefits

Operationalexcellence:functionalfocusandbenefitsachieved


% with Some to Major Implementation

% o

f com

pani

es re

spon

ded

100.%

90.%

80.%

70.%

60.%

50.%

40.%

30.%

20.%

10.%

.%

Forecast Sales&Marketing

Ordermanagement Procurement Manufacturing Distribution Supply chain network

R&D Engineering

ForecastSales&Marketing

Ordermanagement

Procurement Manufacturing Distribution Supply chain network

R&D Engineering

Benefit Achieved to Date

5

4.5

4

3.5

3

2.5

2

1.5

1

78

Lessthan50%ofthecompanieshaveimplementedcustomersegmentation,demandplanningandleanmanufacturing techniques. This low level of implementation results in poor visibility and business performance

Operationaleffectivenesstechniquesandbenefitsachieved




5

4.5

4

3.5

3

2.5

2

1.5

1Customer

segmentationDemand planning

Supplier scorecards

Design for mfg Lean mfg Continuous improvement

Quickchangeover

100.%

90.%

80.%

70.%

60.%

50.%

40.%

30.%

20.%

10.%

.%Customer

segmentationDemand planning

Supplier scorecards

Design for mfg

Lean mfg Continuous improvement

Quickchangeover

% o

f com

pani

es re

spon

ded

August 2009 79

ThoughafewcompanieshaveobtainedqualitycertificationsinISO,SA8000etc,processcontroltechniques,TQMwere not implemented in most of the companies. These factors affects the company’s performance in the areas of quality, inventory holding and therefore cost management

Qualitymanagementandbenefits

% o

f com

pani

es re

spon

ded

100.%

90.%

80.%

70.%

60.%

50.%

40.%

30.%

20.%

10.%

.%

Design for quality Qualitycertification SPC TQM Six Sigma




5

4.5

4

3.5

3

2.5

2

1.5

1


Design for quality Qualitycertification SPC TQM Six Sigma

80

5

4.5

4

3.5

3

2.5

2

1.5

1

Very few companies have the plans of outsourcing their manufacturing and logistics. Most of the companies are not planning to implement cost reduction plans like workforce reduction, product rationalization etc.

Cost reduction

Supply chain network

optimization


% o

f com

pani

es re

spon

ded

100.%

90.%

80.%

70.%

60.%

50.%

40.%

30.%

20.%

.%Reduce

workforceProduct

rationalizationClose Facility

Move production

Outsourcemfg Outsourcelogistics

Transportation optimization


Reduce workforce

Product rationalization

Close Facility

Move production

Outsourcemfg Outsourcelogistics

Transportation optimization

Supply chainnetwork

optimization



August 2009 81

Due to poor visibility in the value chain (customer and supplier), Indian leather companies are fraught with inefficiencies in terms of higher inventory and delayed deliveries. Given the nature of the industry and export destinations, these typically result in high levels of obsolescence

Over50%oftheIndiancompanieshold3–6monthsstock on an average

On-timedeliveryformostofIndiancompaniesislessthan70%

Industry On Time Delivery Inventory Turns

% o

f Com

pani

es

(Annual cost of goods sold) / (average total on hand inventory)

% of on time deliveries

Percentage of shipments that meet customer request date (for the different peer groups).


60.%

50.%

40.%

30.%

20.%

10.%

.%

60.%

50.%

40.%

30.%

20.%

10.%

.%< 2 2-4 4-6 6-8 >8<70% 70-80% 80-90% >90%

% o

f Com

pani

es

Inventory Turns

Human ResourcesThere is a high level of attrition in this industry. Most of the companies indicate attrition levels of over 15%. This results in higher costs for training, poor quality and delay in delivery dates

Attrition levels in Indian Leather industry

InfrastructureNearly70%oftherespondentsbelievethatcustomsclearance, inland transportation delays and power outages are the key disablers of their competitiveness

Attrition levels

% o

f Com

pani

es

60.%

50.%

40.%

30.%

20.%

10.%

.%

>15 % 10-15% 5-10% < 5%


% of companies who responded that infrastructure has significant impact

Multiple responses allowed

Source: Primary Survey conducted by Deloitte

100.%

90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

.%

Customer Clearance

delays

Inland Transport

delays

PowerOutages/ Cost of own

power

Water Others

82

List of Abbreviations

AISHTMA All India Skin and Hide Tanners and Merchants Association APS Advanced Planning and Scheduling ASEAN Association of Southeast Asian Nations bn Billion CAGR Compounded Annual Growth Rate CEO ChiefExecutiveOfficerCETP Common Effluent Treatment Plant CII Confederation of Indian Industries CLE Council for Leather Exports CLIA China Leather Industries Association CLRI Central Leather Research Institute CRM Customer Relationship Management CSIR Council of Scientific and Industrial Research DIPP Department of Industrial Policy and Promotion DnB Dun and Bradstreet e.g. Example EDI Electronic Data Interchange ERP Enterprise Resource Planning EU EuropeanUnionFAO FoodandAgriculturalOrganizationFDDI Footwear Design and Development Institute FDI Foreign Direct Investment FDRA Footwear Distributors and Retailers of America GBS Global Manufacturing Benchmarking Survey IDLS Integrated Development of Leather Sector ISO InternationalOrganizationforStandardsITC International Trade Center JV Joint Venture LCL Labour Contract Law

LVMH Louis Vuitton Moet Hennessy mn Million NGO Non-GovernmentalOrganizationNIFT National Institute of Fashion Technology NMCC National Manufacturing Competitiveness Council PDM Product Data Management PETA People for Ethical Treatment to Animals PIU ProgramImplementationUnitsPLM Product Lifecycle Management QMS QualityManagementSystemR&D ResearchandDevelopmentROA ReturnonAssetsRs. Indian Rupees SA8000 SocialAccountability8000SEZ SpecialEconomicZoneSME Small and Medium Enterprises SPC Statistical Process Control sqm Square Meter SSI Small Scale Industries TMS Transportation Management System TQM TotalQualityManagementUAE UnitedArabEmiratesUK UnitedKingdomUNIDO UnitedNationsIndustrialDevelopmentOrganizationUS UnitedStatesofAmericaUSA UnitedStatesofAmericaUSD UnitedStatesDollarWMS Warehouse Management System WTO WorldTradeOrganization

August 2009 83

Contacts

In this material Deloitte refers to Deloitte Touche Tohmatsu India Private Limited (DTTIPL), a Company established under the Indian Companies Act, 1956, as amended.

DTTIPL is the member firm of Deloitte Touche Tohmatsu, a Swiss Verein, whose member firms are legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms.

These materials and the information contained herein are provided by DTTIPL and are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Further, the views and opinions expressed herein are the subjective views and opinions of DTTIPL based on such parameters and analyses which in its opinion are relevant to the subject. DTTIPL makes no express or implied representations or warranties regarding these materials or the information contained therein.

While due care has been taken to ensure the accuracy of the information contained herein, no warranty, express or implied, is being made, by DTTIPL as regards the accuracy and adequacy of the information contained herein. The information in these materials is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser.

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If any of the foregoing is not fully enforceable for any reason, the remainder shall nonetheless continue to apply.

©2009DeloitteToucheTohmatsuIndiaPrivateLimited

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